Does corn ethanol affect food prices?

A new report from Iowa State University’s (ISU) Center for Agricultural & Rural Development (CARD) examines what impact ethanol subsidies have had on corn prices from 2005 to 2009.

Does corn ethanol affect food prices? This is a question posed in a new report from Iowa State University’s (ISU) Center for Agricultural & Rural Development (CARD). The authors says that rising corn prices in 2006 and 2007, followed by the 2008 spike, and dramatic drop in 2009 would have occurred without ethanol subsidies or even if corn ethanol production had not expanded.

In The Impact of Ethanol and Ethanol Subsidies on Corn Prices: Revisiting History (http://www.card.iastate.edu/publications/dbs/pdffiles/11pb5.pdf), authorsBruce Babcock, ISU economist; and Jacinto Fabiosa, CARD scientist and co-director of the Food & Agricultural Policy Research Institute at ISU,explain thatsevere weather, the U.S. recession, and two general commodity price surges have occurred since 2006, and that it’s wrong to assume that none of these factors has influenced corn prices.

“While we cannot rerun history to see what corn prices would be like today without ethanol subsidies, we can rewrite history in a computer model to estimate what impact subsidies have had on market prices. The model would first need to be calibrated so that its solution re-creates what actually happened in agricultural markets. Then it would need to be rerun after government incentives to produce and consume corn ethanol are removed from the model’s equations. The resulting prices can then be compared to the historical record to estimate the market impacts of ethanol subsidies,” write the authors. The authors created such a model for the 2005 to 2009 corn marketing years, and their findings are available in the new report.

Babcock and Fabiosa add that investor fervor for corn ethanol from 2005-2007 would have occurred even without subsidies because a combination of cheap corn, the phase-out of MTBE, and higher crude oil prices made ethanol profitable.